Question

Assume the following unit‑cost data are for a purely competitive producer:

Total Product	Average fixed cost		Average variable cost		Average total cost		Marginal cost
0 1 2 3 4 5 6 7 8 9 10	$60.00 30.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00		$45.00 42.50 40.00 37.50 37.00 37.50 38.57 40.63 43.33 46.50		$105.00 72.50 60.00 52.50 49.00 47.50 47.14 48.13 50.00 52.50		$45 40 35 30 35 40 45 55 65 75

1. At a product price of $41, will this firm produce in the short run? Why, or why not? If it does produce, what will be the profit‑maximizing or loss‑minimizing output? Explain. What economic profit or loss will the firm realize per unit of output.

Answer 1

a) If the product price is $41, we know that in case of perfect competition, MR=Price= MC. So MC is at profit maximising at 6 units ie is at 40.

So the firm will produce in short run. This is because a firm is able to produce as long as the average variable cost is being covered. In this case, the AVC is 37.50, which is higher than the price, the firm would produce.

The profit-maximizing or loss minimizing output would be 6 units. The economic profit would be P-ATC = 41-47.50= (-)$6.50, which means a total loss of 6*6.50=$39 in short run. The firm would not shut down because the fixed costs would still be paid at $60 and if the business is operating, only $39 would be lost. Hence as long as the average variable cost is being covered, the firm operates in short run.